KIEV/GORKI Russia (Reuters) - Russia cut
off gas to Ukraine on Monday in a dispute over unpaid bills that could
disrupt supplies to the rest of Europe and set back hopes for peace in
the former Soviet republic.

After weekend violence that included the loss of 49 troops in the
downing of a Ukrainian plane, Russia said Kiev missed a deadline for
a $1.95 billion debt payment and it would now only get gas paid for
in advance. It insisted that Ukraine must also ensure that it lets
Russian gas flow through its international pipelines to Moscow's
clients in the European Union.

Kiev and Moscow blamed each other for the failure to agree overnight
on the price of future gas deliveries and refused to abandon well
established positions: Russia offering a discount and Ukraine
rejecting that as a tool for political manipulation.

The talks are bound up with the worst crisis between Russia and
Ukraine since the Soviet Union collapsed and rising tensions over
Saturday's shooting down of the aircraft by pro-Russian separatists
in the east, an attack on the Russian embassy in Kiev and Western
charges that Russia is arming the rebels.

"Thanks to the unconstructive position of the Ukrainian government,
today a prepayment system was introduced," Alexei Miller, the chief
executive of Russian state exporter Gazprom, told Prime Minister
Dmitry Medvedev during a somber meeting at a government residence at
Gorki, outside Moscow.

He said Ukraine had "adopted a position that can only be called
blackmail", adding: "They wanted an ultra-low price."

Gazprom had asked Kiev to pay almost half of a total debt which
Moscow puts at more than $4 billion by Monday morning or face supply
cuts and the prospect of paying up front. Ukrainian Prime Minister
Arseny Yatseniuk accused Russia of deliberately blocking a deal to
cause Kiev supply problems next winter, when temperatures plunge and
heating needs increase.

"But it is not about gas. It is a general Russian plan to destroy
Ukraine," Yatseniuk told a news conference in Kiev. "It is yet
another step against the Ukrainian state and against Ukrainian
independence."

SUPPLIES IN STORAGE

A source at Gazprom said supplies to Ukraine had been reduced as
soon as the deadline passed and Ukrainian Energy Minister Yuri
Prodan said the country was receiving no gas.

Ukraine has almost 14 billion cubic meters of gas in underground
storage, enough to meet its needs until December, the chief
executive of state gas company Naftogaz said.

A long-term reduction of supply could hit EU consumers, which get
about a third of their gas needs from Russia, around half of it
through pipelines that cross Ukraine. Earlier price disputes led to
the 'gas wars' in 2006 and 2009, and Russian accusations Ukraine
stole gas destined for the rest of Europe.

"The gas for European consumers is being delivered at full volume
and Naftogaz Ukraine is required to transit it," Gazprom spokesman
Sergei Kupriyanov told reporters.

EU Energy Commissioner Guenther Oettinger, who brokered the failed
talks overnight, said in Vienna that the European Union might have a
problem and urged Russia to reconsider a compromise.

He said he was confident of gas supplies and also held out the
prospect of further talks to solve the row.

But with both sides filing lawsuits at the Stockholm international
commercial arbitration court to try to recover billions each says
they are owed, any quick agreement seems a way off.

Russian premier Medvedev said talks could start only when Naftogaz
had paid its debt in full.

Russian shares fell on the talks' collapse, which is likely to
increase tensions between Moscow and the West and could make it
harder to arrange a truce in east Ukraine, where Ukrainian troops
are fighting pro-Russian rebels, some of whom want the region to be
absorbed by Russia, as Crimea was in March.

At 05.50 a.m. EDT, the
dollar-denominated RTS index had pared some of its losses and was
down 1.2 percent at 1,358 points, while the rouble-based MICEX was
down 0.5 percent at 1,493 points.

Western countries saw the talks as a gauge of Russian President
Vladimir Putin's willingness to compromise and had been looking for
signs that he was trying to avert the threat of the West adding to
sanctions imposed after Russia seized Crimea.

That move came after Moscow-leaning Ukrainian president Viktor
Yanukovich was ousted by street protests in February and pro-Western
leaders took over power in Kiev. Russia denounced that as a
Western-backed fascist coup.

Tensions rose further at the weekend. Protesters ripped up Russia's
flag outside Moscow's Kiev embassy after the loss of the military
plane in the east. NATO released satellite pictures that it said
raised suspicions about Russia's role in moving military equipment
into eastern Ukraine.

The gas talks broke down in Kiev in the early hours of Monday, with
the sides unable to reach agreement on price and on changes to a
2009 contract that locked Ukraine into paying the highest price in
Europe.

Kiev wants to pay $268.50 per 1,000 cubic meters of gas - the price
it had been offered when Yanukovich was in power. But, in a
compromise last week, it said it would agree to pay $326 for an
interim period until a lasting deal was reached.

Moscow had sought to keep the price at the 2009 contract level of
$485 per 1,000 cubic meters, but had offered to waive an export
duty, bringing down prices by about a fifth to $385, broadly in line
with what Russia charges other European states.

Kiev says that waiving the duty rather than agreeing a new contract
price means Moscow could use the threat of cancelling the waiver to
keep Ukraine under its thumb.

Oettinger said Moscow had declined a compromise proposal under which
Kiev would pay $1 billion immediately and then make monthly debt
payments to Gazprom. Ukraine would also pay $385 per 1,000 cubic
meters in winter and around $300 in the summer months.

(Additional reporting by Maria Kiselova and Denis Pinchuk in Moscow
and Michael Shields in Vienna; Writing by Elizabeth Piper; Editing
by Alastair Macdonald)